A BIDDING war for Sunderland car dealer Reg Vardy took an unexpected twist last night when Lookers rejected an approach by rival-bidder Pendragon for a three-way merger.

Pendragon surprised the City yesterday morning by revealing it was interested in bidding for both Lookers and Vardys.

The move came ten days after Lookers offered £492m - the equivalent of 875p a share - for Reg Vardy, beating Pendragon's previously agreed £450m offer.

Pendragon said the deal would take place via an 800p a share cash offer for Reg Vardy and an all-share offer for Lookers.

Pendragon made an indicative offer that valued Lookers at 600p a share.

But Lookers rejected the approach, saying it undervalued the company's future prospects.

The group said a three-way merger could prove a negative move for the sector, with duplication across the group potentially leading to job losses.

In a statement, Lookers said: "In considering Pendragon's indicative approaches to Lookers, the board of Lookers took into account the significant number of pre-conditions attaching to the proposals, the nature of the consideration being offered and the inadequate premium over the prevailing Lookers' share price.

"The Lookers board, after consultation with its advisors, unanimously concluded that the proposal fundamentally under- valued Lookers' future prospects.

"The benefits of acquiring Reg Vardy are significant for Lookers shareholders and the Lookers board believes that these would be diluted as part of a three-way merger."

The group said its planned takeover of Reg Vardy would be more beneficial to shareholders.

Lookers has 93 showrooms, while Pendragon is the UK's biggest car dealership, with 236 outlets.

Reg Vardy, which has 102 dealership, mainly in the North-East, announced record half-year profits of £21.1m earlier this month.

The company was founded in the 1920s with a haulage business in Houghton-le-Spring, Wearside, and employs more than 6,000 people.

Shares in Lookers and Pendragon rose, while Reg Vardy stock fell.